Poised for Change

Diversity Becomes Key as Boom Begins to Slow

While work is still abundant, the industry is starting to look ahead at life after the age of the megaproject. See the breakdown of the market in our 2008 Top Contractors rankings.

by Alex Padalka

New York's top construction managers have seen an unprecedented volume of business over the past five years in virtually every sector of real estate. But with New York City's 421a tax incentive program due to expire this year year, a number of stadium projects wrapping up, and a nation-wide scare arising from the sub-prime mortgage defaults, new work seems to be drying up.

Not so for the firms that managed to diversify their portfolios and have a bevy of long-standing clients to draw upon for work.

"What differentiates us from our competitors is that we never put our eggs in one basket," says Ralph Esposito, senior vice president of Bovis Lend Lease. Bovis's tri-state staff total 770 personnel, which specialize in residential, mixed-use, healthcare, higher education, culture, and the public sector. "We've done a very good job of spreading those resources to different market segments to isolate us from the business cycle."

Bovis has a two-tiered approach to working in several different market segments, according to Esposito. At the managerial level, executives are highly experienced in their niche markets, while extensive training programs ensure that lower-level personnel can switch seamlessly from, say, residential to healthcare.

"We are fortunate in that 85 % of our business comes from repeat clients," Esposito adds.

Structure Tone, traditionally an interiors firm which has now expanded into new construction and even infrastructure work, has been able to draw upon its vast network of clients for a steady supply of smaller jobs. The firm is nearing completion on the 14,000-sq-ft headquarters for the Jackie Robinson Foundation, located on Varrick St., and has recently completed interior work for three separate clients inside 7 World Trade Center: the 670,000-sq-ft Moody's headquarters, the 35,000-sq-ft Academy of Sciences, and the 15,000-sq-ft New York offices for Ameriprise Financial.

advertisement

"We have a much stronger focus on our clients - we've had many of them for 15 years or longer, and we do multiple projects for them on an annual basis,” says Robert Mullen, Structure Tone's chief executive officer. “Even with our revenues at $2 billion annually, the average size of our projects is still $2 to $3 million a project."

Likewise, Skanska USA Civil has concentrated on serving their existing clients.

"Due to the large amount of available bidding opportunities in our core business area, we have not had to branch out into new directions or expand outside our core competency in our existing market," says Michael Cobelli, senior vice president and general manager at Skanska USA Civil Northeast. "Our traditional clients, the NYCDEP, NYCTA, PANY&NJ, etc., have current construction programs that are much larger then they were 3 to 4 years ago."

Skanska, along with .F. Shea Constructors of Walnut, Calif., and Schiavone Construction of Secaucus, N.J., is currently working on the $2 billion 7 Line Subway extension project for the Metropolitan Transportation Authority, and is part of another joint venture working on the $2.2 billion World Trade Center Transportation Hub.

Partnerships

Every major contractor in the tri-state area has expanded its staff to meet growing client demand. Tishman Construction, a privately-held firm, has grown its personnel from 700 people just two years ago to close to 1,000 today, while its two-year-old Las Vegas office now counts 150 people. Over the past three years, Structure Tone, which was founded in New York but now has 21 offices in six different countries, has expanded its tri-state staff by 25 %; Skanska has grown its employee base in New York by 20 %; and Turner Construction Co., which has 5,800 employees worldwide, has expanded its New York-New Jersey staff by 100 to 150 people. Bovis has grown from 590 people in 2002 to 770 today - its biggest increase in history, according to Esposito.

The size of some of New York City's singular projects, however, dwarf entire capital programs in some medium-sized cities in the rest of the nation. In addition, the level of sophistication in building on 100 % developed land requires experts in several different fields, which for one company alone is practically impossible to achieve.

"I have a guy who's running [the Jet Blue Terminal at John F. Kennedy Airport] project, and it's a $550 million job--that's the size of an entire market, like Pittsburgh or Denver," says Pat Di Filippo, executive vice president of Turner Construction. "The project size in the state of New York for the major contractors--they're just big. With big size comes big risk and big headaches."

Few firms can take on projects such as the Freedom Tower on their own. The 1,776-ft, 2.6-million-sq-ft building, designed by New York's Skidmore, Owings & Merrill for the Port Authority of New York and New Jersey, will be the tallest in New York when it is completed in 2011. Tishman, which is also building World Trade Center towers 3 and 4 for Silverstein Properties, is unique in being able to handle the entire project on their own.

"Some of the more complicated jobs - not your regular office or apartment building - require geotechnical, transportation, and underground experience," says Bovis's Esposito. "By virtue of the kind of sites that are available, it has gotten more sophisticated with all the components you have to contemplate. We don't look for people to partner to minimize our financial exposure, but we look to partner where it makes sense, where there's a clear benefit."

Bovis has partnered with the Hunt Construction Group to build Citi Field, the New York Mets' new baseball stadium in Queens designed by HOK Sport and scheduled for completion next year. At the World Trade Center site, Bovis has partnered with Fluor Enterprises of Irving, Texas; Skanska USA Civil of New York; and Granite Northeast Construction, a division of Granite Construction of Watsonville, Calif., on the new $2.2 billion World Trade Center Transportation Hub.

"Each time we come together, we're creating a factory that has to produce a widget, and it's new each time," says Di Filippo. "You put in weather, union labor, safety of public workers - you're talking big numbers, you're talking about companies that have to be built for success at all levels. We have seen that what works 10 years ago does not work today.”

Future Markets

A correction, while unavoidable, may again present new avenues to firms that are poised to take advantage of the state of the marketplace.

“There are certainly some expectation of a downturn in the marketplace, and we can expect to see delayed and cancelled projects, as well as an increased risk of subcontractor failure,” says Structure Tone's Mullen. “If the amount of work declines sharply, our competitors may overreact and leave.”

As new condo markets are drying up, contractors are seeing a surge in new projects in healthcare, higher education, and hotel markets. Pavarini McGovern Construction Company, a member of the Structure Tone Organization, is working on the $190 million expansion and renovation of the New York Law School in Downtown Manhattan. The project includes a new building that will have five to six stories above ground and five below ground. Pavarini is also scheduled to complete the 204,000-sq-ft, 20-story Standard Hotel in Manhattan's Meatpacking District in the third quarter.

"As hotel demand and tourism stay strong, I think a lot of residential sites will potentially get flipped to hospitality use," says Bovis's Esposito.

“For our clients who may have deferred or delayed projects due to high cost, this is an opportunity to reevaluate the projects and move ahead,” says Mullen. “There's going to be some correcting of the pricing which will create some opportunities for those that have a viable project. As a whole, there's an opportunity for the industry to catch our breath--a time to focus to make sure everything's where it's supposed to be, relative to sustainability, safety, training.”

A Laboratory City

"One thing that has definitely changed is that [New York] is becoming a laboratory city that it wasn't before," says Turner's Di Filippo. "Labs and research are becoming more and more a part of our life. It used to be just clinical – now there's teaching, there's clinical, and there's research. Healthcare is on fire everywhere."

Turner recently completed the $503 million Memorial Sloan-Kettering Mortimer B. Zuckerman Research Center and the Memorial Sloan-Kettering Breast and Imaging Center. Last fall, Turner started work on the Rockefeller University’s new $400 million Collaborative Research Center, which will add 125,000 sq ft of lab space to the campus, and broke ground on the Alexandria Center for Science and Technology at the East River Science Park, a $700 million, 1.1-million-sq-ft bioscience center designed by RMJM Hillier of Princeton, N.J., which will spread across a 3.7-acre site on the east side of Manhattan.

Tishman, meanwhile, completed the $200 million Michael F. Price Center for Genetic and Translational Medicine at the Albert Einstein College of Medicine in the Bronx last fall. The five-story, 201,000-sq-ft includes 40 laboratories to support biomedical research.

Bovis is managing construction on New York-Presbyterian Hospital’s $140 million Vivian and Seymour Milstein Family Heart Center, designed by New York's Pei Cobb Freed & Partners. The center is scheduled for completion in 2010.

Materials and Manpower Shortages

The boom of the past few years has put a strain on trained labor, management personnel, and materials prices.

"Typically , when the private sector is building, the private sector isn't - that's what it's been in the past 28 years I've been here," says James Abadie, senior vice president and principal-in-charge of the New York office at Bovis. "In the past two-three years, both sectors were running full throttle, like an endless supply of money. It taxes the contracting community."

In addition to diminished bonding capacity, Abadie points out that  the huge amount of work forces a rise in general costs as a result of a "just because" price. "[As a contractor], I used to do two-three jobs a year, and now I have six," he explains. "I don't really need it, but I can do it--but if I will do it, I'll put this price on it."

Abadie says rising prices have particularly impacted foundation, superstructure, and curtainwall trades. With a slowdown in construction in the rest of the country, however, Abadie predicts more competitive pricing down the line.

One positive effect of this uncertain and tight market has been a growing demand for closer collaboration between developers, designers, and contractors.

"We certainly recommend our clients to bring us on board earlier," says Mullen. "With some of them, we come on for preconstruction services three to six months, sometimes even a year before construction begins."

In addition, new firms have been given a chance.

"We are bringing in new subs that we have never used before," says Abadie. "These guys are turning out to be O.K. guys - they just never had the financial strength or the bondage that we do."

Retaining and Holding on to Staff

The country has seen increasing shortages of graduates in construction management and engineering for several years now, and the New York firms and trade associations have stepped up efforts to appeal to the younger generations. However, the boom has resulted in some unscrupulous practices that make even holding on to staff difficult.

"There's an enormous amount of respect among the large companies about how they would go acquiring staff, using headhunters," says Turner's Di Filippo. "But if you're a new company coming into the city, you don't care what it takes to get people."

In order to keep its people, Turner has turned to "soft" things: ensuring increased interaction from the management all the way to the lowest person in the organization, engaging staff outside of work, and fostering a sense of partnership and family. Overall, however, the reputation of the top contractors in the city has carried them through.

"This challenge was more a fear then it was an actuality, says Cobelli. "It was surprising to us that we have had relatively little difficulty attracting and recruiting qualified personnel. I believe that the strong reputation of Skanska and our portfolio of interesting and challenging projects have made Skanska a very attractive place to work for prospective employees.

Safety

The one thing that is on everyone's mind, in the middle of a very busy if not, seemingly, chaotic construction market, is safety.

“Hanging and improving our safety culture was a great challenge for us that is a never-ending pursuit for zero accidents,” says Cobelli. “We feel we have made great strides in this area but will continue to utilize innovative and employee interactive methods to continue to improve the safety on our projects.”

"New construction is putting a strain on New York," says Livingston. "The sheer volume of construction means there will ll be more accidents. So we have put in safety controls and safety training and beefed up our safety department by a number of people."